Thursday, May 9, 2013

How to Deal with a Board of Directors

Now, if you've been in business long enough, you'd know you need a board of directors (as long as you have a corporation, nonprofit, LLC, etc.). However, putting together the right board of directors is best. Therefore, we need a standard, right? Hopefully the tips below will help outline that standard.

Now, if you have the right founding team, then part of your board should involve your founders (if you have more than one founder (not just yourself)). A bad board, even a couple of bad directors on that board, can be very toxic to your company and its culture. Company culture depends on stability, and when you lack a good board or lack stability on your board, your company will fail to have stability.

Some are not sure of the size of the board, but realistically a board should be proportional to its effectiveness, much like most committees. Three directors is best when you're starting out and usually good enough for a while. However, upgrading to five eventually is good. Having anymore than that, particularly for small businesses, is a bad idea. Unless you have an enterprise, where 7 is usually best, don't go above five.

Many think that if you have a board size of five, chip it down to four eventually, when you find the one bad apple. If there are no bad apples, you did a good job creating the board.

Now, who's to be on the board? How about the chairperson (who should not be an executive, but more like an adviser. If it is any executive, the CEO would be only proper.), CEO, and  CTO? The chairperson has the deciding vote and one who helps to manage the board so it's best.

If the CEO is also the chairperson, there may be a level of control over the company that could be overbearing and toxic. Since CEOs are great leaders, giving them too much power over the company can cause a takeover scheme, particularly if the CEO is not one of the founders. Many say that the only appropriate time that a CEO can be chairperson is when he/she is also a founder of the company. Let it stand as that, and let the risks go: find a good chairperson with great leadership skills.

The chairperson needs to be experienced and successful in the business you're involved in. Also important is that all board members having some kind of operating experience. Startup companies and small companies are roller coaster quite frequently, so if someone has run a company before, you should consider placing them on the board before anyone new to the game. The board of directors is meant to direct the CEO in what he/she is supposed to do (which is why they're called directors).

Venture Capitalists & Investors

It's very important to remember and keep in mind that if you get any venture capitalists involved in your financing of the company, they will probably want a board seat. It's customary to do so, and can lead to great success, sometimes. However, angel investors usually don't get a board seat, because they usually make small investments, anyway.

Many times the venture capitalist involved in your financing will want a board size of five: you appoint two directors, they appoint two directors, and some independent non-executive chairperson agreed by both parties. This is customary, but not always the case.

How should the board be paid?

Founders should never be paid to sit in on the board while still working for the company. Neither should the venture capitalist(s). Don't let the VC close the round with $25,000 per annum, or the likes of which.

Pay only the non-executive directors, depending on the time commitment, how early they join, and whether they work at the company full-time or not. Most boards that I'm aware of frequently pay they board members who're not working in the company, but actually working at a different company (but sitting in on the board). Many times, these people that sit in on the board, who're part of another company, are key shareholders.

People decisions are important for your board, so make it a good priority to have a stable operating board. Comment below for your opinion on the matter.

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